How much risk are you willing to take?

In this lesson you will learn 💸

How risk and return relate in the financial world
The difference between a conservative, moderate, or aggressive investor

What is risk?

You know what risk is in real life. It’s a situation involving exposure to danger. Why would anyone take risks? Because of the rush it gives them in return. It’s the same with investments. The higher the risk, the higher the expected return – with the important caveat that there’s no guarantee of this. That’s the risk.

Let’s say...

You wanted to invest for your retirement. You could put your money into a savings account and generate very little, if any, return. You could opt for a medium risk investment and, hopefully, fare better or you could take a high-risk strategy and pray that the money you recoup (your ‘return’) is more than you would have got with a less risky strategy.

What influences risk when it comes to investing? 🎯

Pick the right answer

When I make my investment

😕 Unfortunately that's not correct

Even though it might seem tempting, so called 'market timing' trying to find the best moment to invest does not significantly lower or increase your risk unless you are in the camp of day-trading. Your risk is mostly influenced by the time you have available, the mix of your investments and you money mindset.

Time available to invest, my money mindset and the mix of investments

👏 Correct!

The risk when investing is influenced by all three, the time you have available (investment horizon), the mix of your investments (diversification) and your money mindset which influences how you deal with the ups and downs.

How much I invest

😕 Unfortunately that's not correct

The risk in investing is that you expect a certain return, but this return is not guaranteed. With the amount you invest you can control how much money you might gain or lose, but not the risk of an unfavourable return itself.

What determines your personal risk tolerance?

So you know the risks of taking risks, but what about you? How brave or cautious are you? This is what’s known as your "risk tolerance".

Risk tolerance is influenced by:

Your personal situation and circumstances: the less money you have, the less risk you can afford
Your emotional predisposition: your money mindset and how well you'll cope with the ups and downs

What type of an investor are you?

When translated into investing, there are broadly speaking three different types of investors:

Conservative: are wary of any type of risk that could jeopardise their savings
Moderate: aim to follow a balanced approach, assume some risk for the expectation of a return
Growth oriented: tend to be market-savvy, using their knowledge to target maximum returns

Your action 📝

How about putting it to the test by going through a dedicated questionnaire for financial personality test?

Take one of the many online investment tools, most of them, if not all, will ask you some questions up front when opening a demo account - that is the so called risk assessment. You can take it without having to open or fund the account.
Use one of the free online risk assessment tools, we liked the University of Missouri online Investment Risk Tolerance Assessment or the risk tolerance calculator by CalcXML, both are free to use.

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